EUR 850.00 For Business Accounts Only

Morningstar | After a Fresh Look, We're Increasing Intercontinental Exchange's FVE and Stewardship Rating

After taking a fresh look at Intercontinental Exchange, we are increasing our fair value estimate to $73 per share from $70. In addition, we are upgrading our stewardship rating to Exemplary and maintaining our wide economic moat rating. Our main thesis is that ICE shouldn't be viewed as an exchange but more as a data company. In recent years, close to 60% of operating income was generated by ICE's trading and clearing segment and 40% was attributable to information services. Over the next five years, we believe those roles will be reversed. Our updated fair value estimate translates into a 2019 price/earnings of 21.3. Currently the stock trades in line with our fair value estimate. If the shares were to drop, however, we think ICE's wide moat and potential for growth could provide investors a significant margin of safety in a high-quality business.

Jeffrey Sprecher founded the company through the acquisition of the Continental Power Exchange, which became the foundation for ICE. Since then, Sprecher has acquired many traditional exchange assets and mined them for ancillary data assets while using the acquired intellectual property to create new products. The best example of this is ICE’s 2013 acquisition of NYSE Euronext. Sprecher has certainly had a vision for exchanges after they had been operated as nonprofit, fraternal networks owned by the exchange's members. A more recent example of this vision is ICE's acquisition of Bank of America/Merrill Lynch bond indexes. These are indexes that already rely on data from IDC, another firm that provides bond price data, which ICE acquired in 2016. This is traditional vertical integration but in an industry not previously known for it. We only have two potential concerns for management: if it were to become too aggressive on pricing or overpay for an acquisition.

Whether it be ICE's exchange data or bond price data, ICE's exchange and bond data assets are highly sticky solutions for which there often isn’t a direct substitute. This gives the company significant pricing power and is largely why we increased our fair value estimate and view ICE favorably. That said, some investors have become irritated with what they believe have been overly aggressive price increases on NYSE exchange data and have written to regulators crying foul. ICE will make the claim that the price of exchange data has gone down. Outside of comments that management has made and reports produced by interested trade groups, we cannot substantiate management’s claims that pricing has actually gone down. From talking to customers, we can verify that price increases have been aggressive. While regulators could prevent ICE from achieving significant price increases in exchange data, investors have also benefited from years of declining transaction costs. For now, we think pricing will remain aggressive in part because we think it will be hard to effectively regulate. In addition, ICE’s assets outside exchange data, like IDC’s bond data, are less exposed to regulation.